Asif Noor – Modern Systematic Macro (S6E9)
Flirting with Models
In Risk Management, Caution Trumps Conviction
Balancing conviction and risk management is crucial in trading decisions. When independent signals align on a specific trade, while it may seem like a strong opportunity, it raises concerns about increased risk, particularly if these models that are typically uncorrelated start showing correlation. The risk of concentrating investments in a single direction can lead to significant losses, highlighting the importance of emphasizing risk management over conviction. Experience teaches that drawdowns influence this perspective, indicating that managing downside risk remains paramount, even when the allure of potential alpha is strong.
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